Bank liability structures are sometimes represented as an inverted pyramid and the following diagram is approximately to scale for a typical commercial bank. The first thing to notice is just how small the equity base at the apex of the pyramid is. The bulk of their funding comes from customer deposits and these are relatively short term (the proportion of time deposits with a maturity beyond 90 days (three months) is usually very small). Long-term debt is usually only a small fraction of total liabilities.
Deposits from other banks are usually made to support a correspondent banking relationship where the bank provides a local ser vice to another bank operating in a different region or country. Some deposits arise from bank’s activities in the wholesale interbank markets where they lend to and borrow from one another, usually on relatively short terms.
The interbank market is an important source of funding for many foreign banks operating in emerging markets. Branching restrictions mean they frequently lack the local currency deposit base enjoyed by domestic banks. This does, however, tend to put them at a disadvantage in terms of funding costs relative to local banks. Interbank rates in developing markets are often rather volatile as a consequence of their lack of depth and liquidity.
Posts Tagged ‘debt’
The Inverted Pyramid
Monday, October 12th, 2009Medium- and Long-term Finance
Sunday, October 4th, 2009Banks have a similar range of medium- and long-term financing options as industrial and ser vice companies. These include equity raised through private placements or rights issues, straight bonds, conver tible bonds, preference shares and subordinated debt. These usually comprise only a relatively low propor tion of a bank’s funding and capital management factors are usually the main consideration in raising medium- to long-term finance.
The World Bank
Friday, September 4th, 2009The World Bank was established as the International Bank for Reconstruction and Development (IBRD). The latter, somewhat cumbersome, title provides a more accurate description of the bank’s role. The IMF has more of the functions and responsibilities one would expect from a world central bank.
The World Bank was set up to address long-term development issues and to reduce global poverty. It provides funding for basic infrastructure projects to developing countries. It is also mandated to facilitate reforms to reduce global poverty. This is clearly well intentioned but the evidence shows that it has had limited success. Its effor ts in sub-Sahara Africa have had few positive results, for example.
The gap in terms of wealth between developed and many developing economies has widened. The blame for this should not be laid at the feet of the World Bank, however. Its resources are a small fraction of private investment flows and subsidies on agricultural products and other commodities by developed countries have taken their toll on incomes in developing countries.